The evidence that its members states are seeking to escape from the International Monetary Fund's "jurisdiction" continues to mount. Most recently, Uruguay, the IMF's third largest borrower, became the latest country to announce that it was prepaying its outstanding obligations to the IMF, and the IMF was forced to downgrade the multilateral consultations on global economic imbalances that it had proudly unveiled in April because leading economic powers have proved reluctant to fully engage in these consultations.

The IMF has made some efforts to deal with the challenges it faces. In September, its members approved marginal increases in the voting power of China, Korea, Mexico, and Turkey and agreed to consider more general revisions to the formula for calculating each member state's quota and a doubling of its basic votes.

These changes still leave the Fund's decision-making concentrated in the hands of the world's richest nations, and since the increase in basic votes requires an amendment to the IMF Articles of Agreement, it is not clear when this may occur. Even if they are fully implemented these modest reforms will fail to resolve the IMF's legitimacy and relevancy crisis because they do not effectively address the underlying cause of its problems: the IMF's failure to adapt its governance structures to its evolution from a specialized monetary organization into a macro-economically oriented development financing institution.

To understand the IMF's problem it is necessary to look at its original governance arrangements and the distortions that have arisen from its failure to adapt these to its changing functions.

When the IMF was established in 1944 its member states agreed to surrender some of their monetary sovereignty in exchange for the benefits of a rules-based monetary system in which all states committed to maintain a fixed value for their currencies, and in which the IMF acted as both the overseer and the financier to members in need. In all its operations, the IMF staff, operating under the firm oversight of its Board of Executive Directors, focused only on those macroeconomic and monetary variables that affected the state's obligation to maintain its currency's par value, leaving the member states free to choose policies needed to reach the agreed macroeconomic and monetary goals.

The IMF's governance structure, despite being based on a system of weighted votes, had a built-in check on the influence of its most powerful member states. They understood that, since they would use (and in fact did use) the IMF's services, its policies could directly affect their own citizens and they could be held accountable by them for these policies.

When this system collapsed in the 1970s the IMF amended its Articles of Agreement to allow each member state to determine its own exchange rate policy. This had two important operational consequences. First, it created a de facto distinction between those rich IMF member states, such as the United States, Germany and Japan, that had access to alternate sources of funds and so did not need to use the IMF's services ("IMF supplier states") and those developing country member states that did need to use its services, such as Argentina, Ghana, and Indonesia ("IMF consumer states").

Second, at least in the case of IMF consumer states, the range of the IMF's interests expanded, over time, beyond macro-economic and monetary issue to include any issue, regardless of how intrusive into the affairs of its member state, that could affect the balance of payments and the monetary situation of its member states.

The IMF's failure to adapt its original governance arrangements to its changed operations has resulted in the following problems:

IMF-Supplier State Relations: The supplier states, because of their wealth and power are both independent from the IMF and have the votes and Board representation to control its decision making. This means that they can make decisions for the IMF that will never affect their citizens. This situation of decision-makers having power without accountability to those most affected by their decisions is ripe with potential for abuse.

IMF-Consumer State Relations: Although, there is great variation in conditions among the consumer states, the underlying causes of their macroeconomic challenges lie in the governance of their societies. The IMF has attempted to deal with this reality by increasing the range of non-macroeconomic issues its addresses in its operations in these countries, thereby becoming an important actor in their policy making processes. Although this narrows their policy space, consumer member states cannot effectively challenge the IMF because they are dependent on its financing or its approval for access to financing and cannot easily influence its decision making.

IMF-Non-State Actor Relations: The creators of the IMF believed that it was not necessary for the IMF to have any direct interaction with non-state actors, such as labor unions, human rights organizations or community associations. Given its important role in domestic policy making, this position is no longer valid. There is no obvious reason why the IMF, when it "descends" into the national policy-making process, should be less accessible or accountable to those people directly affected by its decisions than other actors in this process.

IMF-International Organizations Relations: The IMF, because of the broadening scope of its operations, encroaches on the "jurisdiction" of other UN specialized agencies. In general, because of disparities in their financial and political resources, these other agencies have been unable to either challenge the IMF or to effectively coordinate their activities with the IMF. The resulting de facto expansion of IMF "jurisdiction" both disempowers the other agencies and increases the cost of the IMF giving bad policy advice.

IMF's Lack of Internal Accountability: The IMF still operates on the erroneous assumption that its existing channels of accountability--the IMF's Board of Executive Directors, and the Board of Governors--are sufficient. Most consumer member states are only indirectly represented on the Board of Executive Directors, on which IMF supplier states hold the overwhelming majority of the votes, and the IMF's operations have become too complex for these directors to effectively exercise firm oversight over the management and staff. The Board of Governors, comprised of central bank chiefs and finance ministers, meets infrequently and is not designed to deal with particular operational cases.

The IMF's lack of effective internal accountability mechanisms has an important operational implication: it means the staff and management are essentially unaccountable. The Executive Board of the IMF has not required the management to develop a publicly available set of operating rules and procedures to guide their activities. This deficiency grants IMF management and staff great discretion and increases their vulnerability to pressure from the most powerful member states.

How can these problems be solved? There are three basic approaches that can be taken:

Declare the IMF to be irredeemably flawed and should be abolished. This approach, followed by many activists critical of the Fund, is unrealistic. The increasingly integrated global financial system needs an international organization where all states can meet to discuss issues relating to the global monetary and financial system, including the challenges the current system poses for the poorest and weakest states in the system. Thus, while it is possible to close the IMF, we cannot eliminate the need for such an organization--and in the current geopolitical climate it is not realistic to expect to create a new one.

Change IMF policies. This approach, while raising important issues, is ultimately inadequate because it focuses on the symptoms rather than the real cause: the IMF's decision-making structure. Without changing this structure, the IMF will always adopt policies that are insufficiently responsive to the needs of its consumer member states.

Undertake comprehensive reform of the IMF's governance. This approach, which is the most feasible, is based on the premise that the IMF must adhere to the same principles of good governance--transparency, predictability, participation, reasoned decision making, and accountability--that apply at the national level.

The IMF needs a comprehensive program of reform to bring it into compliance with these principles. This reform program be divided into short-, medium- and long-term components, based on who must act to implement the reform proposal. Short-term items are those which only require action by the IMF management and Executive Board. Given the current vulnerability of the IMF and the general questioning of its role even by officials in the G7 countries, it is realistic to assume that, with some effort by activists and non-government organizations (NGOs), the Board can be persuaded to implement at least some of these items. Medium-term items are those that will require the participation of the IMF's Governors and are politically more sensitive. These items will, therefore, require more concerted efforts from activists and NGOs and more collaboration with government ministries and legislatures in member states. Long term-items require amendments to the Articles of Agreement, which, for many IMF states, including the U.S., require ratification by their national legislature.

A comprehensive reform agenda consists of the following components:

â€¢ Make the IMF more responsive to stakeholders: This requires establishing formal procedures for free communication between IMF officials and all interested parties, including non-state actors, in its member states; increasing the number of alternative executive directors for those Board constituencies with large numbers of IMF member states; increasing consumer state and decreasing Eurozone representation on the IMF Board; and using double majority voting procedures.

â€¢ Make the IMF more transparent: This requires producing a publicly available manual of IMF operating policies and procedures; publicly releasing drafts of official reports and policies and inviting public comment on them; and opening the selection procedures for the IMF's Managing Director and senior staff.

â€¢ Improve the Fund's accountability: This requires appointing an ombudsman with the power to investigate complaints from any party who feels that it has been harmed by the IMF's failure to act in conformity with its mandate or its operating policies and procedures; and subjecting the IMFs managing director and senior staff to periodic evaluation.

Unless the IMF implements this comprehensive governance reform program, it is unclear that it will ever be able to effectively contribute to solving the complex monetary and financial challenges or the problems of poverty, inequality and inadequate governance which plague our world today. Fortunately, the current crisis of confidence in the IMF creates a good opportunity to persuade the IMF to adopt its most important elements.

About the Author:Daniel D. Bradlow is professor of Law and Director, International Legal Studies Program, American University, Washington College of Law, Washington D.C. and Research Associate, Centre for Human Rights, Faculty of Law, University of Pretoria. He is also a contributor to Foreign Policy In Focus (www.fpif.org).

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